The FTX Scandal: An Opportunity To Regulate Crypto Assets
On November 2, 2022, the Coindesk website published an article according to which the cash flow of Alameda Research, an investment fund created by SBF that was supposed to be separated from FTX's activities, was largely supported by FTT, the cryptocurrency invented by its sister company, and not by an independent asset as is customary.
On November 6, Chang Peng Zhao, the founder and boss of Binance, the competitor platform and the world's first crypto exchange, put a whole new spin on these suspicions by indicating on Twitter that Binance would liquidate the FTTs in its possession due to the recent revelations during their due diligence as stated in its twitter account: “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com”.
Many users then rushed to sell the FTTs in their possession for fear of the asset being devalued. Withdrawals were suspended from the exchange as of November 9 leaving thousands of investors unable to transfer their assets. On the 11th, FTX declared bankruptcy and began liquidation proceedings.
In addition to drawing attention to the dangers of the cryptocurrency industry, this scandal shows the need for regulation in the crypto sector to avoid other similar scandals. If regulation is necessary, it must be done in a way that meets the needs of the market, protects the consumers. Thus, it should be done within a well-defined framework.
In this article, we will analyze the main axes that should be considered to regulate cryptocurrency.
A clear definition of the nature of cryptos.
The nature of crypto-assets has always been a topical issue. The complexity of the technology and the lack of knowledge about it make it impossible to place crypto assets or at least associate them with a category of traditional financial assets. Thus, this definition gap creates a lack of clarity for consumers and investors of crypto. Therefore, the definition of the nature of the latter should be the first step towards regulation of this sector on sound legal foundations. This means determining whether crypto assets can be considered as securities, commodities, or if the crypto belongs to a category of its own. So, in addition to providing more clarity, the classification of crypto-assets could also open the market to more investors who will be able to make more informed choices based on which category they fall into.
Consumer Protection-oriented Regulations
According to the Wall Street Journal, FTX had allegedly lent billions of customers' money to funds to sister company Alameda Research trading firm without the customers' consent. This scandal has demonstrated how exposed consumers can be to fraud in the crypto sectors and the risks they will continue to face if regulations fail to prioritize consumer protection. Such regulations will also protect consumers from some of the risks of investing in crypto-assets and help them avoid fraudulent schemes.
Such a goal can be achieved when regulations create safeguards for consumers to engage in these platforms while reducing their risk of becoming a victim of fraud. This will be achieved by implementing requirements that crypto service providers must meet, creating strict liability regimes for crypto service providers, strengthen anti-money laundering regulations and extend them to crypto assets and preventing market abuse and insider trading practices.
Finally, future regulations should also be applied to "Stablecoins" so that issuers have reserves on a one-to-one basis to ensure consumer protection and reduce volatility risks. Thus, as Ms. Denelle Dixon suggested: "stable currencies must be stable".
As we await the outcome of the FTX scandal and the changes it may bring, the future of the crypto is still unclear. It will be interesting to see how it will evolve in the future and what orientations the different states and jurisdictions will take regarding crypto.
By Shamma Geste